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How to Choose Between Unsecured Personal Loan Types

[Jan 30, 2009.]


Unsecured personal loans customarily come in two main types: the installment plan and the line of credit. Often, the lending institution will offer the borrower the choice between these two alternatives for repayment of the personal loan.

Here are a few things to think about before and during that choosing process:

When Will Total Repayment Occur?

This question is key to all aspects of the persoal loan process but especially when choosing between an installment repayment option and a line of credit.

If the borrower is not exactly sure when the full balance will be paid back, a revolving line of credit can provide flexibility and then be paid back in full at a set date. However, the total interest paid on the loan is often higher than for a loan with a fixed payment schedule, e.g. an installment plan.

An installment plan is desirable if the borrower has a steady source of income but needs a lump sum loan right now for a specific purpose. For instance, to pay college tuition expense. Installment plan repayment is great for someone who has a regular paycheck and can spare some money week to week.

A personal loan used to repay back taxes is a good option for an installment plan. A line of credit can work well for waiting out a bout of unemployment.

How Much Are We Talking Here?

Again, an ever-important question.

An installment plan repayment schedule, because repayment occurs at fixed intervals, requires a borrower to see the future, at least near-term, with a high degree of certainty. If that's not possible--for example, unemployment is a problem--then a significant sum is not likely to be offered with an installment repayment option.

A line of credit may be more closely tied to credit score, rather than income--the old "good for it" rule. The lending amount on these personal loans, then, often are higher than their installment plan counterparts. Depending, of course, on the perceived credit risk of the borrower.

If the borrower has a longstanding relationship with a bank, for example, the bank may extend a good-sized line of credit without demanding collateral and without demanding regular repayment. This can occur even in today's difficult borrowing environment.

No matter what type of personal loan is obtained, privacy protection is a must.


About Author:

Andrew Freiburghouse is a writer and businessman. He has worked as a magazine reporter, tax preparer, screenwriter, copywriter, and loan officer. He graduated from Santa Clara University in 1999 with a B.A. in English. Andrew was born and raised in the City of Los Angeles.

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